Italian and Spanish factories shrug off impact of pandemic

Italian and Spanish manufacturers have shrugged off the resurgence of the coronavirus pandemic by reporting a continuing improvement in activity in October, according to a widely watched business survey.

The IHS Markit flash manufacturing purchasing managers’ index outstripped economists’ expectations in both Italy and Spain, boosted by rising exports and solid domestic demand, data published on Monday showed. 

The Italian index rose to a 31-month high of 53.8 in October, from 53.2 in the previous month. Spain’s index hit a three-month high of 52.5, up from 50.8 in the previous month.

A reading higher than the 50 mark indicates that a majority of businesses reported an expansion in activity from the previous month.

IHS Markit also revised up its manufacturing indices for Germany, France and the eurozone from initial flash readings published two weeks ago. As a result eurozone manufacturing PMI hit a 27-month high of 54.8 in October, up from 53.7 in the previous month.

The survey results were in sharp contrast to Europe’s services sector, which has been hit much harder by measures which aim to contain the virus — underlining how manufacturers’ supply chains have remained relatively unscathed and exports are rebounding, particularly to Asia.

“Although the reintroduction of containment measures since the survey was conducted has certainly weakened the manufacturing outlook, we think their direct impact on the sector will be milder than during the spring,” said Daniela Ordonez, economist at Oxford Economics.

Unlike during the first lockdowns in the spring, many factories have so far continued to operate despite renewed social restrictions aiming to slow the spread of the virus after companies implemented sanitary measures to protect workers.

“It is looking good for manufacturers,” said Marco Valli, an economist at Italian bank UniCredit. “I think it will continue, but the problem is [that] now with these soft lockdowns you will see services get hit and I would be surprised to see manufacturing completely decouple.”

Italian manufacturers reported steady growth in production on the back of an acceleration in new orders from both domestic and foreign customers.

“Improvements in foreign demand continued to provide a boost to the sector, as export order books expanded at the sharpest rate since early-2018,” said Lewis Cooper, an economist at IHS Markit. 

However, Italian factories reported that lead times — the time taken to complete the production process — were their longest since May. IHS Markit said the delays were caused by increased demand for inputs, logistical issues and rising cost burdens, adding that “the extent of the disruption was much less severe than at the height of the pandemic in the spring”.

“With Covid-19 cases on the rise and new restrictions being introduced, the recovery has the potential to stall if factories are unable to operate, or if client demand falls considerably as it did in the spring,” said Mr Cooper.

Even though new restrictions to contain a second wave of coronavirus infections are less strict, they are still expected to cause another downturn in the economy, which the government in Rome is predicting will finish the year 9 per cent smaller than last year.

The Italian economy rebounded from its pandemic-induced recession in the first half of this year — when factories, schools and non-essential shops were closed — with third-quarter growth of 16.1 per cent. 

Spanish manufacturers reported their fourth consecutive month of increasing production, with growth reaching its highest level since July. However, unlike Italy, the increase in orders was not strong enough to keep pace with production, leading to a build-up in inventories.

Paul Smith, economics director at IHS Markit, said: “A welcome acceleration in manufacturing production growth was recorded during October, although with the gain in new orders lagging behind output, [Spanish] manufacturers built-up inventory and were able to clear any work outstanding.”